Does your employer offer an employee stock ownership plan, or ESOP? If not yet, it may soon. Research from Georgetown University shows that companies that offer employee stock ownership plans have fared significantly better during the recession than those that do not offer such plans.
Experts predict more companies will begin offering ESOPs as retirement options for their employees.
The opportunity to own a slice of the company where one works -- at no cost to the employee -- sounds fabulous, but it has drawbacks.
Nothing to lose -- except securityRenee Fellman, a turnaround expert who focuses on fixing employee stock ownership plans in the manufacturing sector, says that employees should know what they're getting into. While employee-owners share in the company's success, they also share the risks. For instance, if the company is in a declining industry or the firm's ESOP doesn't outline specific guidelines for accountability throughout the organization, an employee's stock in the company could be doomed to fail.
On the other hand, ESOPs that are set up correctly in growing businesses can be a powerful tool to build retirement savings.
While not every employee stock ownership plan will turn out to be a wealth-building gift, there's rarely a reason to turn down the benefit if it's offered. "Even if the ultimate benefit turns out to be only one dollar, it is still a free dollar," says Kyle Coltman, the managing director of SES Advisors who has designed and implemented more than 500 ESOPs.
"The company is funding a retirement benefit for the employee and it's one that costs the employee nothing. All eligible employees should participate in their ESOPs," says Coltman.
Employees who take time to understand the benefit and how it can fit into a larger plan for their retirement savings will fare better.
What you need to knowCompanies that offer employee stock ownership plans are required to provide qualifying employees a summary plan description, which includes information about eligibility and participation requirements. As a first step, an employee should read through this description.
Many companies also conduct employee communication sessions to inform employees about their employee stock ownership plan and the performance of their investments, says Jared Kaplan, an ESOP attorney at McDermott Will & Emery based in Chicago.